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ECA repayable tax credit - a step in the right direction

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24th Jul 2008
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The Bourne Agenda is a fortnightly blog brought to you by Bourne Business Consulting LLP, an independent tax and business consultancy with offices in London and Farnham.

The last few years have seen environmental friendly “green” issues steadily rising up the political and social agenda. Almost every sector and aspect of life has had an energy saving or carbon efficient initiative introduced.

The property industry is a prime target as the occupational energy needs of buildings account for 40% of the primary energy consumption in the UK – a staggering amount which accounts for 50% of the UK’s greenhouse gas emissions – and the government has been making moves to address this through tax legislation.

Finance Act 2001 introduced Enhanced Capital Allowances (ECAs) on energy efficient and water saving assets, and the scheme has been regularly revised and modified ever since.

Despite offering a 100% writing down allowance in the first year, companies were initially slow to react due to the administration involved and limited number of assets that were included within the scheme. Additionally only tenants could claim the allowance. This signaled an inauspicious start to the government’s primary piece of “green” tax legislation.

The scheme was extended to include landlords in Budget 2002 - a big step in the right direction, and progress was made in respect of the number of assets included as suppliers started to realise the benefits of having their products registered within the scheme. In addition improvements were made to the website www.eca.gov.uk to enable assets to be more easily identified.

Having seen a greater take up of the scheme in recent years we are now particularly encouraged to see the removal of two of the remaining significant failings of the scheme.

Firstly, key assets i.e. general lighting within offices, did not qualify for the scheme if they did not qualify for plant and machinery allowances.

This has been revised following the introduction of integral features post 1 April 2008 (the reduced rate of relief for integral features also increases the NPV benefit of ECA’s).

Secondly, loss making companies had no incentive to “green” their buildings as they could not claim the enhanced tax relief. This has now been addressed through the introduction of the ECA tax credit to provide a cash repayment based on the expenditure incurred on energy and water efficient assets in loss making companies.

Under the new legislation the loss making company will receive a first year tax credit of 19% of the loss surrendered attributable to ECAs, subject to an upper limit. The upper limit of the tax credit will be the greater of:

  • The total of the company’s PAYE and National Insurance Contributions (NICs) liabilities for the period for which the loss was surrendered; or
  • 250,000

Therefore, loss making companies can spend a minimum of £1,315,789 on ECAs before they are potentially restricted by the PAYE/NIC limit.

In reality most large loss making companies should only be limited to the PAYE/NIC which should easily cover the ECA expenditure. However there is one potential issue when considering some corporate structures. For example, we have seen situations where a corporate sets up a separate company to act as a service company containing the corporate’s employees. If the capital expenditure on property is incurred in a separate entity the company would always be limited to a tax credit of £250,000.

On the face of it the credit is much like the tax credit scheme under the R&D tax credit system. However the key difference is that the R&D tax credit is only available to small and medium enterprises whereas the ECA repayable tax credit is available to all companies.

In summary, I believe that these latest developments are continuing to improve the workability and credibility of the ECA scheme as a useful tool for promoting green products within the property industry.

These changes will take time to sink in and have an impact on behaviour, but after the first seven years of the scheme the right framework is finally in place. The next key challenge in making ECA’s work is to ensure the tax departments spread the message to the property teams specifying the products - and that when ECA products are included they are actually identified and claimed on the return - but that’s another story!

Bourne Business Consulting LLP, based in London, was named Best Tax Team in a Boutique Firm as part of the Lexis Nexis Taxation Awards 2007. For more information, contact Bourne on 0207 960 2730 or visit www.bournebc.com.

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